Calendar Year vs. Accident Year vs. Policy Year - these terms refer to methods of organizing insurance data. Calendar year data typically represents incurred losses (paid losses and changes in reserves) regardless of when the claim occurred or when the policy was issued. Calendar year data are typically financial data and generally do not effectively match losses with the premium and exposure of the policies under which the losses were paid. Calendar year data are generally not used for ratemaking analyses, but are sometimes used for certain short-tailed lines because the calendar year data may not be significantly different from accident year data. The benefit of calendar year data is that the data are available quickly after the end of the particular time period.

Accident Year data tracks claims paid and reserves on accidents occurring within a particular year, regardless of when the claim occurred or when the policy was issued. Accident year data do a better job at matching losses with the premium of the policies under which the losses were paid. Accident year data are not available as quickly as calendar year data because time is needed for the accident year data to develop, i.e., time for claims occurring within a particular period to be reported and settled.

Policy Year data track claims arising from policies issues in the year, regardless of when the accident occurred or when the claim was reported. Policy year data does the best job of matching losses with the premium and exposures of the policies under which the losses were paid. Policy year data take the longest time to develop.

Capital Gains - Capital gains (or losses) are a form of investment gain (or loss) achieved by the sale of investment assets. For example, if an insurer purchases some stock for its investment portfolio and later sells the stock for a gain, that gain is a capital gain. If the stock were sold at a loss, it would represent a capital loss. Capital gains are identified as either realized capital gains for unrealized capital gains. Realized capital gains are those actually achieved during a given period by the insurer from the sale of assets. Unrealized capital gains are the gains an insurer would have realized had the insurer sold the assets. Unrealized capital gains are important in insurance because they are included in the calculation of the insurer's surplus and net worth.

Case versus Bulk versus IBNR (Incurred But Not Reported) loss reserves - case reserves are reserves associated with a specific claim. Bulk reserves are reserves generally associated with a group of claims. IBNR reserves are reserves for anticipated claims that have yet to be reported.

Casualty Actuarial Society (CAS) - The CAS is the professional organization of property casualty actuaries. The CAS administers a series of examinations to qualify actuaries for professional designation and for membership in the American Academy of Actuaries. The CAS also holds regular meetings ("proceedings") in which current research in actuarial methods and issues is presented and discussed. The overwhelming majority of the CAS membership is employed directly or indirectly by insurance companies. Another sister organization - the Actuarial Standards Board - produces Actuarial Standards of Practice designed to guide the work of actuaries.

Class Relativities - The difference in rates between various rating classes is a rate relativity. For example, if the consumers in one part of the state are paying 20% more for auto insurance, all else equal, than consumers in another part of the state, the territorial rate relativity of area one is 1.2 compared to 1.0 for area 2.

Commissions and Brokerage - payments made to agents and/or brokers.

Credibility - refers to the amount of weight given to various estimates of losses or loss trends. Stated another way, credibility is the measure of the statistical significance of estimates produced from various data sets. An estimate produced from a larger data set will generally be a more reliable predictor than an estimate from a smaller data set. Actuaries rely on certain standards to determine if the data underlying various estimates are sufficient for purposes of the ratemaking estimates. If a particular set of data has 100% credibility, then the data is considered to be of sufficient volume that the estimate of claim costs can be based 100% on those data. If the data volume is not 100% credible, the actuary must supplement the estimate from the data set with another data source and/or estimate.

Exposure - Exposure is the basic unit of coverage provided by an insurer. For private passenger automobile, an exposure unit is a car-year - one vehicle insured for a full year. For coverages related to value of the vehicle or property, the exposure may be more specific - a car year or a house year per $1,000 of insured value.

Fiscal Accident versus Calendar Accident Years - Calendar accident year data refer to accident year data for a given calendar year, i.e., the accident year from January 1 through December 31. Fiscal Accident year data refer to accident year data for a twelve-month period other than from January 1 through December 31. For example, a fiscal accident year may be the accident year data for the period July 1 through June 30.

General Expenses - administrative expenses, including senior management.

Investment Income - Insurers have significant funds to invest. The source of funds includes equity (or surplus) and policyholder-supplied funds. Policyholder supplied funds available for investment include the various reserves - unearned premium, loss and loss adjustment expense. Because insurers are continually selling new policies as older policies come to the end of their term, insurers have a steady flow of revenue. Thus, insurers are able to invest fund amounts greater than the amount of equity in longer-term financial instruments. Insurers earn more investment income with coverages for which claims are paid out over a longer period of time. For example, insurers earn more investment income on bodily injury liability than on collision coverages because it will take years for all the bodily injury claims in a given period to be settled and paid, while it will take a much shorter period for all the collision claims in a given period to be settled and paid. Thus, the insurer holds bodily injury reserves longer than collision reserves and will earn more investment income on the bodily injury reserves because the reserves are invested for a longer period before being needed to pay all claims. For some coverages, investment income is so significant that the insurer pay out more than $1.00 in claims and expenses for each $1.00 in premium received and still make a reasonable profit. Investment income generally refers to dividend and interest income and not to capital gains.

Loss Adjustment Expense - Expenses associated with settling claims, distinct from the actual claim payments to consumers. LAE includes cost of investigating and litigating claims.

Loss Development - Loss development is the pattern of claim occurrence and payment over time. Property coverages typically have a shorter development pattern ("tail") than liability coverages. See description in section 4.

Loss Trends - Loss trends are changes in loss frequency (number of claims per thousand vehicles insured) or loss severity (average payment per claim) over time. The combination of frequency and severity is called pure premium, which is an insurance term for average claim payment per insured vehicle. Loss trends are used to adjust historical loss data as part of the process of estimating future losses in the ratemaking process.

Other Acquisition Expenses - expenses other than commissions or brokerages associated with acquiring business.

Paid versus Incurred Losses - paid losses refer to the actual dollars of claim payments made by an insurer to policyholders in a specific time frame. Paid claims may be related to policies from any number of earlier periods. Incurred losses are paid claims plus changes in loss reserves during a given period. Incurred losses better reflect the loss experience associated with exposures during a given period because of changes in loss reserves, which may have been established from earlier periods.

Premium Trends - Premium trends refer to changes in average premium per exposure over time. For property coverages, premium can increase - even if rates do not change - because consumers regularly trade in older cars for newer cars or because insurers regularly increase the amount of insurance on a home. Thus, for certain automobile insurance coverages - collision and comprehensive - insurers earn more revenue each year without increasing rates, all else equal.

Rate versus Premium - A rate is the charge per unit of insurance coverage. A premium is the result of applying a rate to a particular consumer's set of coverages and circumstances. An insurer's rate filing contains rates - base rates and additional factors for specific characteristics of the consumer, vehicle, or property. For example, a good driver may get a discount from the base rate, while a bad driver might have a surcharge factor applied to the base rate.

Rating Factors and Rating Classes - Rating factors are characteristics of the consumer, vehicle, or property used by insurance companies to determine different premiums for different consumers. A rating class is the group of consumers with identical rating factors. For example, automobile insurance rating factors include age, sex, and marital status of the driver, geographic location, and driving record. Homeowners insurance rating factors include type of property construction, year of construction and geographic location. Every discount or surcharge represents a rating factor. For example, a discount for a clean driving record creates rating classes of people with clean driving records. Rating factors may also be used in underwriting. An important issue for consumer advocates is the use of rating factors (including underwriting guidelines) that unfairly discriminate against consumers by causing consumers of essentially the same risk to be charged different rates. The premise behind redlining is that some consumers are charged higher rates for factors that are not related to risk.

Reinsurance - Insurance purchased by the insurance company. Insurance experience is typically reported on either a direct or net basis. Direct refers to the initial insurance company experience as if there was no reinsurance. Net refers to experience after the effects of reinsurance - direct experience plus reinsurance assumed less reinsurance ceded. Reinsurance ceded means that part of the insurance portfolio laid off to another insurance company. Reinsurance assumed means that part of another company's insurance portfolio accepted by the reporting insurance company.

Reserves - insurers receive significant amounts of money up front in exchange for the promise to pay future claims. Insurers establish unearned premium reserves for premium received but not yet earned by the insurer, loss reserves for claims made and to-be-made but not yet paid, and loss adjustment reserves for claim settlement expenses not yet paid but expected to be paid on claims made and to-be-paid. Insurers invest reserves and earn investment income.

Short-tailed versus Long-tailed lines - The pattern of claim filing and settlement varies across coverages of insurance. For some coverages, the claims associated with policies in a given period will take years to be reported and settled. Lines of insurance with long development of claims are called long-tailed lines. Lines and coverages in which the pattern of claim filing and settlement is measured in months are called short-tailed lines. Short-tailed coverages include private passenger automobile physical damage and, generally, residential property coverages.

Statistical Agents and Advisory Organizations - A statistical agent is an organization designated by a state insurance department to collect insurance statistical data on behalf of the insurance department. An advisory organization, by collecting data from insurance companies and providing reports to insurance departments, acts as a statistical agent in many states. However, an advisory organization's principal activities are to analyze the information collected from insurance companies and provide recommendations to insurance companies on policy forms and rates (technically, "prospective loss costs"). Advisory organizations are only able to provide joint decision making services for insurance companies because insurance companies are exempt from federal anti-trust statutes.

Symbols - Symbols are rating factors used to determine the price of automobile insurance. Symbols combine information on the new cost of the vehicle, the susceptibility of the vehicle to damage, and the relative cost to repair the vehicle. Thus, two vehicles with the same new cost may have different symbols - and, consequently, different automobile insurance premiums - because one vehicle is more susceptible to damage in a low-speed crash or costs more to repair a damaged bumper, for example.

Taxes, Licenses and Fees - insurers pay taxes, license fees, and other fees, in addition to federal income tax. Federal income tax is considered elsewhere.